President Trump has announced his intention to nominate Kevin Warsh to become the next chair of the Federal Reserve Board of Governors. We believe Warsh will be confirmed by the Senate and serve as an effective, thoughtful Fed chair. He brings intriguing ideas on ways to change and ideally improve how the Fed operates. We also remain confident in the outlook for Fed independence, which appears to have broad support not just in markets but in Congress as well.
Warsh is well-known, respected, and accomplished. After earning a law degree from Harvard, he began his career on Wall Street, then joined the National Economic Council under President George W. Bush, and then served with distinction as a Fed governor from 2006–2011. This Fed tenure included the global financial crisis (GFC), when Warsh was a valued liaison between the Fed and financial market executives. Since leaving the Fed, Warsh has split his time as a distinguished visiting fellow at the Hoover Institution and as an adviser to legendary investor Stan Druckenmiller.
Warsh’s views on the Fed balance sheet
Over the past 15 years, Warsh has written and spoken extensively about Fed policy. He has raised concerns about the size and composition of the Fed’s large balance sheet. He has also questioned the central bank’s reliance on forward guidance – which he believes is excessive and sends confusing signals about future monetary policy – along with what he views as the Fed’s failure to anchor policy formulation and communication to policy rules that are less subject to meeting-by-meeting discretion.
More recently, Warsh has argued for a new “Treasury–Fed accord” that could, depending on the details, provide over time a framework for the Fed working in tandem with the Treasury – and perhaps also with the housing agencies Fannie Mae and Freddie Mac – to shrink the size of its balance sheet. This is noteworthy because the Fed is now once again growing its balance sheet through reserve management purchases of T-bills, having ended its quantitative tightening (QT) program (i.e., policies to reduce the balance sheet) in December 2025. Under Warsh’s approach, a new framework may also include the Fed gradually shifting the composition of its balance sheet to a much shorter duration than at present, as was the practice before the GFC.
Warsh’s views on interest rates and Fed communications
As for Fed interest rate policy, Warsh has recently argued that the Fed has been “backward-looking” and too slow to cut rates. Thus, he would very likely favor delivering at minimum the two 25-basis-point cuts for 2026 indicated in the December 2025 Fed economic projections (the “dot plot”). These cuts, which are largely priced into markets, would bring the federal funds rate down to a range of 3%–3.25%.
The Federal Open Market Committee (or FOMC, the policy-setting group of Fed governors and regional presidents) that Warsh will inherit is divided over when, how much, and how often to cut the policy rate. That said, under the Fed’s and PIMCO’s baseline scenario, we believe Warsh will be able to garner at least the seven votes he needs on the 12-person FOMC to deliver those two cuts this year – and perhaps a third cut that would bring the fed funds rate down to 2.75%–3% percent, which notably is the median of the FOMC’s current estimate of neutral.
Beyond those next two or three rate cuts, we believe Warsh may be more wary, depending on the inflation outlook. He understands that longer-term bond and mortgage yields incorporate not only the Fed policy rate, but also expected inflation, and he may hesitate to press for additional rate cuts if measures of expected inflation were to rise much above current levels. Current expectations for long-run inflation remain consistent with the Fed’s 2% inflation target.
Perhaps the biggest difference investors may notice between the Warsh Fed and the Jerome Powell, Janet Yellen, and Ben Bernanke Feds is in communication policy. Warsh, based on his writings since leaving the Fed, may be much less likely to rely on extensive forward guidance about the future path of interest rates, especially during “normal” times – as is the case today – when interest rates are not pinned at the zero bound. Warsh can point to precedent: Paul Volcker for eight years and Alan Greenspan for his first 17 years chaired very successfully a Fed that delivered price stability and supported strong growth with little if any forward guidance as we know it today on the future path of policy rates. However, financial markets (and Fed watchers) since then have become quite accustomed – and critics would say addicted to – Fed “open mouth” operations, and the transition to a new communication regime may be bumpy.
Disclosures
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